Ethical to Refinance an Underwater House?

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Abciximab
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Ethical to Refinance an Underwater House?

Post by Abciximab » Thu Apr 07, 2011 11:35 pm

My wife and I are considering refinancing our mortgage from a 15-year to a 30-year to lower our monthly payments by about $900 a month.

We are about $50k underwater on our house, but our bank will still refinance because of some government program. This is our first house, and we're underwater because we bought at the wrong time and rode the bubble right down. Assuming home values just stay the same, it will take us three or four years to get to the break-even point. So if we don't refinance, we'll have to wait at least that long to avoid a short sale. If we do refinance, we're basically guaranteeing a short sale as the principle won't be payed down to an appreciable level for ten years or more (and there's no way we'll be here that long).

So if we don't refinance and move in three years we will be lucky to walk away with zero equity and owe nothing with a normal sale. If we do refinance and move in three years we will save $33k in reduced mortgage payments and have to do a short sale. We'll save about $41k if we move in four years.

Because of our low debt to income ratio we'll be able to purchase another home prior to the short sale, so I suppose the credit damage isn't a factor. We're trying to decide what to do based on what's smart financially, but we don't want to do anything unethical. I feel like the right thing to do is pay what we owe and not skip out on our debt. But whenever I ask someone about this they all say, "everyone is doing it," and, "it's the smart thing to do." My wife and I keep going back and forth and can't decide what to do. Any thoughts?
An investment in knowledge always pays the best interest - Benjamin Franklin

Anon1234
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Post by Anon1234 » Fri Apr 08, 2011 12:17 am

You have not broken your promise until you complete the short sale.

However, you're saying you want to make a new promise you don't intend to keep. That doesn't seem very honest.

I sold 2 houses in 2009 and walked away cash neutral, however I suffered huge paper losses from the 2007 high. I didn't understand the "strategic default" or "short sale" strategies back then. I'd like to think I wouldn't have employed them, but can't say for sure... I was ignorant so I wasn't really tested.

Maybe stiff a credit card balance and see if you can sleep? Go to your grandmother's grave and explain it to her?

Interested to hear what you decide.

bhmlurker
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Post by bhmlurker » Fri Apr 08, 2011 12:44 am

How difficult is it for you to scrimp and save 30-40k? If you feel what you proposed is not 100% ethical, then at least do it for a lot of money. Otherwise you violates your ethics for some amount that you could've saved in 2-3 years by other means.

It doesn't matter if "everyone is doing it" and "it's the smart thing to do". What matters is whether you decide to do it, and whether you think you'll ever feel like you compromised on your own principles. If not, then go for it.

arthurb999
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Post by arthurb999 » Fri Apr 08, 2011 7:55 am

I'd do it. Look out for #1... no one else is.

KyleAAA
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Post by KyleAAA » Fri Apr 08, 2011 8:08 am

I'd do it. The bank wouldn't be willing to do it unless whatever "government program" they are talking about would compensate them adequately. The bank is going into this deal with eyes wide open, so I don't see how you could make a case that you were taking advantage of them.

Arbez
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Post by Arbez » Fri Apr 08, 2011 8:58 am

You probably don't owe the bank any favors. Mostly they get those from the Fed. If so, do what is right for your finances. The credit damage may be a factor, you can never tell when you may have to move and buy a new house. If it's not a lot of money, keeping your credit intact is worthwhile.

The answer depends on who holds the mortgage. If held by a credit union or community bank, I would be more likely to avoid a short sale.

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enderw88
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Post by enderw88 » Fri Apr 08, 2011 9:04 am

KyleAAA wrote:I'd do it. The bank wouldn't be willing to do it unless whatever "government program" they are talking about would compensate them adequately. The bank is going into this deal with eyes wide open, so I don't see how you could make a case that you were taking advantage of them.


Any time you write "government program" replace it with "your fellow citizens money" then see if it still meets your ethical standards...
Craig | Tucson, AZ

KyleAAA
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Post by KyleAAA » Fri Apr 08, 2011 9:04 am

enderw88 wrote:
KyleAAA wrote:I'd do it. The bank wouldn't be willing to do it unless whatever "government program" they are talking about would compensate them adequately. The bank is going into this deal with eyes wide open, so I don't see how you could make a case that you were taking advantage of them.


Any time you write "government program" replace it with "your fellow citizens money" then see if it still meets your ethical standards...


Yep, still does!

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tadamsmar
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Post by tadamsmar » Fri Apr 08, 2011 10:24 am

Any business will terminate any contract under its terms if that is the best financial decision. As shareholders, we would probably be outraged if they did not, but that's theoretical because, as far as I know, they always do.

For instance, businesses will walk away from property contract and forfeit the collateral if that is the best financial decision. No big deal. I bet we all own stock in companies that have done that.

I don't know why a homeowner with a mortgage should fret about doing the exact same thing.

matt
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Re: Ethical to Refinance an Underwater House?

Post by matt » Fri Apr 08, 2011 11:23 am

Abciximab wrote:We are about $50k underwater on our house, but our bank will still refinance because of some government program.


The intent of the program, ill-conceived as it may be, is to allow you to refinance. So go ahead and do it. I didn't turn down the $8,000 home buyers credit just because it was a dumb economic idea and other taxpayers were footing the bill.

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Abciximab
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Post by Abciximab » Fri Apr 08, 2011 3:32 pm

Refinancing definitely doesn’t pass the “ask your grandmother test”, which inherently makes me think it’s the wrong thing to do. We don’t want to do a short sale, but I just don’t see the market rebounding enough to make up for our losses. I think the only way we can do a regular sale is by paying down the mortgage principle. So... don’t refinance.

It would take us a couple years to save about $30k, so it’s a decent chunk of money to us. I see your point, bhmlurker, and I tend to think the same way. Is stealing a candy bar the same thing as stealing someone’s car? No, one is obviously worse, but both are wrong. As much as I try not to let it, the amount of money on the line does weigh into our decision. So... maybe refinance.

The bank is Wells Fargo, and I too am surprised that they’re willing to offer a refinance when the new mortgage essentially guarantees negative equity for a good ten years (unless house values increase). They have to know most people won’t stay in their homes for that long, right? So... refinance.

I know someone is getting stuck with the loss if it isn’t me. Whether that be the bank or the government or the taxpayers. Again, this isn’t something I’m okay with, but every year we get killed with federal income tax. We’re fortunate to earn enough money to be in a high tax bracket, and I can’t help but feel like it’s kind of owed to us. Terrible thought, I know. I can’t stand it when people think the government owes them something. Yet here I am thinking the same thing. And it's not like we drained our equity to buy a boat or finance a lifestyle we can't afford. So... maybe refinance.

I assume the reason for the program was so people who couldn’t afford their payments could refinance and keep their homes. We can make our payments, but I’d much rather save the $900 difference and use it to pay down our student loan debt (which I can’t deduct the interest on because we earn too much). Financially it’s smarter to refinance, hands down. So... refinance.

That’s 2 yeses, 2 maybes, and 1 no. Looks like my wife and I have some thinking to do. Thanks for everyone's input so far. More feedback is definitely welcome.
An investment in knowledge always pays the best interest - Benjamin Franklin

Easy Rhino
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Post by Easy Rhino » Fri Apr 08, 2011 4:31 pm

How sure are you that you're going to move in a few years? How good a deal would the refi be if you were going to stay in the house long term. Lower interest rate?

Is a refi to the same 15 year perior an option?

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Abciximab
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Post by Abciximab » Fri Apr 08, 2011 4:54 pm

I'm 100% sure we'll move within five years. The new mortgage will be at the same interest rate as the current mortgage. I guess keeping the same rate is a stipulation in the program.
An investment in knowledge always pays the best interest - Benjamin Franklin

Easy Rhino
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Post by Easy Rhino » Fri Apr 08, 2011 5:00 pm

Well, if you had a 30 year mortgage, you could always choose to make larger payments, turning it into a 15 year mortgage.

If the rate stays the same, and they don't charge you fees, I don't see a downside to the refi.

Heck, if you missed a payment or two, they'd probably lower the rate. :twisted:

swaption
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Post by swaption » Fri Apr 08, 2011 5:03 pm

Just keep it simple. You're making all sorts of assumptions about what you might be doing anywhere from 3 to 10 years from now, and wha house prices might look like. Just forget about all that.

What is best for you right now? If a refi works, then go for it. In a few years you might not even be underwater. Or perhaps you are slightly underwater, but mortgage rates are 7%, so it still makes financial sense to stay where you are.

When the time comes and it makes sense to proceed with a short sale, then cross that bridge when you come to it. Of all the mortgage related evils, I would hardly label a short sale as something that merits the proverbial Scarlet Letter.

The melodrama regarding mortgage default has just piled on a bit thick. In the macro picture, it's about billions of dollars of losses that nobody wants to take. All the big banks, investors, FNMA, etc are fighting it out to force them upon eachother, something we never would have seen in the past. The rules have changed, yet everyone wants the homeowner to fly the straight and narrow. I really don't need to go through life as if I have generations of deceased relative passing judgement on the morality of my actions, particularly in this case where some of them might be inclined to be a bit less moral than many might expect.

blevine
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Post by blevine » Sat Apr 09, 2011 12:47 pm

See nothing wrong with refi.
You still owe them money on the same house, but they are
extending the payment schedule to help you stay current, hoping
that eventually things will improve.

It is up to the bank to determine if it's a good risk or not.
If they do not think so, they would turn you down.
Your plans to move in 5 years have nothing at all to do with this other
than comparing your own personal savings vs closing costs to be added to the debt, to make sure you more than break even (sounds like yes).

Nothing much makes sense in the mortgage market over the last few years, you are overthinking this. Just be honest on the mortgage application and let the bank decide what's best, that's what you are paying them for (in your applicaiton fees). I don't think they can factor in how long you will stay there since you can always change your mind.

SherieSilver
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Re: Ethical to Refinance an Underwater House?

Post by SherieSilver » Thu Apr 21, 2011 12:45 am

I think you should do what makes sense for you financially. In my opinion, we are all in this together and it certainly is not your fault alone that your house is underwater and that the market tanked. No one is giving you a bailout either.

exeunt
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Post by exeunt » Thu Apr 21, 2011 9:06 am

You don't own banks a thing. They do everything legal to scrape an extra penny from their clients, and they expect you to do the same.

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bottlecap
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Post by bottlecap » Thu Apr 21, 2011 9:13 am

I think that if you can afford to pay for the home and you do a short sale instead, it is unethical. It's not the refi, which the bank has offered of it's own free will, that is unethical - it's the short sale. The fact that everyone else is "doing it" means nothing. If you borrowed the money form a friend, family member or a neighbor, I suspect you would have no question. Well, that's what you did by getting a loan from a bank. Don't let the fact that the bank gathered up your friends', families' and neighbors' money to lend fool you.

That said, there may be nothing illegal about what you're doing. From an ethical standpoint, however, you would be shirking your duty to pay and forcing the loss on others.

If you can't afford the home, that's a slightly different story. Then, you could at least say that the bank misused everyone's money by giving you a loan that you clearly were not able to pay. It doesn't get you off scott-free in the ethics department, but at least you could say that it was a mutual mistake in the first place.

Of course, this is just the way I would look at it.

JT

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